What does Trustpower Limited's (NZSE:TPW) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like Trustpower Limited (NZSE:TPW), with a market cap of NZ$1.77b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into TPW here.

How much cash does TPW generate through its operations?

Over the past year, TPW has reduced its debt from NZ$678.32m to NZ$498.98m – this includes both the current and long-term debt. With this debt payback, TPW's cash and short-term investments stands at NZ$19.79m , ready to deploy into the business. Additionally, TPW has produced NZ$238.26m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 47.75%, signalling that TPW’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TPW’s case, it is able to generate 0.48x cash from its debt capital.

Can TPW meet its short-term obligations with the cash in hand?

At the current liabilities level of NZ$154.56m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.95x, which is below the prudent industry ratio of 3x.

Can TPW service its debt comfortably?

TPW’s level of debt is appropriate relative to its total equity, at 34.78%. This range is considered safe as TPW is not taking on too much debt obligation, which may be constraining for future growth. We can test if TPW’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TPW, the ratio of 6.07x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as TPW’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TPW’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how TPW has been performing in the past. I suggest you continue to research Trustpower to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for TPW’s future growth? Take a look at our free research report of analyst consensus for TPW’s outlook.
2. Valuation: What is TPW worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TPW is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.